In the seven years since the Dodd-Frank Act was passed, we have learned a lot about the financial services industry and its importance to our economy. We have seen what has worked, what has failed and what is needed to spur economic growth. One of the greatest factors hindering a full economic recovery following the 2008 financial crisis is improperly calibrated regulation of the financial services industry, including regional banking institutions.
As chairman and CEO of Zions Bancorp., I am proud of the impact that my bank has on the local economies we serve, and the larger impact that regional banks make on the nation’s economy as a whole. Regional banks — like Zions and about 20 others — operate traditional banking business models. We take deposits and offer consumer and commercial loans that support small businesses critical to economic growth. My bank has $32.4 billion in loans to businesses, the median balance of which is $72,000. That excludes business credit cards, which would reduce the median balance even further. Relative to money-center banks, regional banks disproportionately provide this type of credit, supplying the financial equivalent of oxygen to small businesses, while presenting a fraction of the systemic risk posed to our economy by the very largest financial institutions.
As mandated by Dodd-Frank, any bank carrying more than $50 billion in assets is labeled “systemically important.” This asset threshold is an excessively blunt instrument to measure a banking institution’s risk, and fails to look at the holistic risk profile of a bank. For example, the nation’s largest bank, JPMorgan Chase, has total assets that are 39 times the size of Zions. But its total payments activity was 616 times larger than that of Zions over the past year, and its derivatives exposure is over 5,000 times larger than ours.
Most importantly, the $50 billion asset threshold stifles critical regional bank lending to consumers and small businesses. Small businesses are the backbone of the economy, responsible for two out of every three private-sector jobs created in the U.S. Without credit from regional banks, many fewer small businesses would be formed, and fewer would grow meaningfully. A 2016 Harvard Business School report on the state of small-business lending found that between 2007 and 2012, small businesses’ share of total net job losses was approximately 60%. The report notes, moreover, that small-business startups declined materially, and have never fully recovered.
Since the enactment of Dodd-Frank, regional banks have exponentially expanded the size of their risk management and compliance staffs to deal with a flood of new regulations and regulatory guidance. We’ve built, at enormous cost, elaborate modeling capabilities to comply with the law’s stress test requirements, even though our own results are effectively annulled and superseded by the Federal Reserve’s own results from secretive models that many believe are particularly punitive with respect to small business lending.
Thanks to this one-size-fits-all $50 billion asset threshold for systemic-risk designation, regional banks have seen their costs rise, and their capital strained. Customers end up as victims, as banks have less flexibility to customize products to meet clients’ needs, and as the price of banking services increases to pay for this much more complex regulatory environment. If regulations on regional banks were eased, those banks would have additional capital — as much as $4 billion each year — to lend. This is because current regulations have resulted in a reduction of regional bank lending by 6% to 8% each year.
It is clear that the current system does not work. Former Rep. Barney Frank, a co-author of the Dodd-Frank Act, said in 2016 that the $50 billion asset threshold was set “too low,” which was a “mistake.” He noted, “When it comes to lending and job creation, the regional banks are obviously very, very important. I hope that if we get some regulatory changes, we give some regulatory relaxation to those banks.”
The more that regulators, economists and congressional leaders look at how to define systemic risk in the banking system, the more they are realizing that an arbitrary asset threshold isn’t the right way to go. Former Fed Chairman Ben Bernanke, when asked a question about systemic risk regulation at a Brookings Institution event, agreed, saying, “It’s not just size … it has to do also with opacity, complexity, interconnectedness and a variety of other things.” Using a scorecard developed by the Financial Stability Board and the Basel Committee on Banking Supervision to determine risk, the Treasury Department found that the largest money-center banks had risk scores between 11 and 14 times greater than even the largest regional bank. Regional banks are much simpler organizations than the money-center banks, which are characterized by large capital markets and trading operations, and sizable off-balance-sheet exposures. They should be treated differently.
Rep. Blaine Luetkemeyer, R-Mo., who has introduced legislation that would determine a bank’s risk based on a multifactor system, noted, “Practically all the regional banks are basically just big community banks that don’t play in the risky world” of the biggest money-center banks. He’s right. It’s time for our leaders in Washington to promote a regulatory environment that encourages business creation and growth. Support for regional banks benefits entrepreneurs, homeowners and other consumers who rely on these straightforward banks for loans and banking services. It’s time to change the inappropriately tiered regulations hindering these financial institutions that have always served their customers’ best interests. By properly measuring risk — using factors beyond mere asset size and gauging a bank’s entire risk profile — we can usher in a new period of economic growth by freeing up regional banks to do their jobs.